February 28, 2007

The Economist Endorses Offshore Tax Havens

The Economist last week presented a 14-page special report on why offshore tax havens are good for us. In 2005 the Tax Justice Network estimated that $255 billion in revenues is lost each year from governments whose citizens hold their funds in offshore tax havens, a figure the magazine says "not everyone believes" even though no one has ever shown this number to be inaccurate. The effects of offshore financial centers (what we might call havens) are divided into two categories. One effect is tax evasion, which the Economist and everyone else claims to recognize as harmful, and the second is "tax competition" which is presented as being beneficial and even outweighing the harm from tax evasion.

Several arguments are made that "tax competition" is important and healthy. One is that governments need an incentive to lower their corporate taxes to a (low) level that will benefit the economy. But if low corporate taxes were so good for us, surely that seems like the sort of decision our elected government is supposed to make and is quite capable of making. Another argument cited is that tax havens actually help larger countries with normal tax rates like ours by lowering the effective rate paid by companies, who in turn find our country a more tolerable place to invest. Again, if lowering the effective tax rate would attract so much investment to our country that the loss of revenue would be outweighed by the increase in investment, surely that is exactly the sort of decision our elected government can make. How could it possibly be just to say that tax havens help us by allowing companies to evade the tax laws that our elected government decided were optimal?

Another argument mentioned is that perhaps companies in larger countries with normal tax rates like ours receive so many benefits from their subsidiaries in offshore financial centers that it helps our economy in the end. Perhaps that's true in some cases. But a lot depends on what these subsidiaries really are. Insofar as any of them are the "companies" that really exist on paper only for tax avoidance purposes, this argument cannot apply. Senator Kent Conrad (D-ND), during a recent meeting of the Budget Committee which he chairs, described how 12,000 "companies" claim to inhabit one five-room building in the Cayman Islands. These "companies" can hardly be said to create a benefit for anyone except the owners who are evading taxes in the U.S. and other larger countries.

Which brings us to the point that a lot of what's going on in "offshore financial centers" is really tax evasion and is therefore quite illegal. On ways to stop tax evasion, the authors seem to endorse information sharing between jurisdictions. That's an easy solution anyone can agree on - except the jurisdictions that profit from their refusal to hand over such information and the lobbyists who represent their customers. Another suggestion is that jurisdictions like the United States lower their taxes to reduce the incentive for tax evasion. By that logic we could reduce speeding on America's highways by raising the speed limits to 150 mph, or reduce stealing by abolishing property rights. If you want real solutions for dealing with tax havens and other causes of the tax gap, see Bob McIntyre's suggestions to the Senate Budget Committee.

Should Cigarette Taxes Be Used to Pay for Healthcare?

Twelve states are considering proposals to hike cigarette taxes, mostly in order to pay for healthcare initiatives, while a proposal in the U.S. Senate would hike the federal cigarette tax to fund an expansion of the State Children's Health Insurance Program (SCHIP). Of the 12 states, seven would use the money for healthcare. In one of those states, Indiana, the increase may now be off the table. Governor Mitch Daniels's proposal to increase the tax from 55.5 cents to 80.5 cents was just rejected by the State House of Representatives.

In the U.S. Senate, Gordon Smith (R-OR) argues that increasing the federal cigarette tax from its current level of 39 cents to 79 cents would raise $31 billion over five years while increasing it to 99 cents would raise $46.5 billion over five years. Senator Smith is not proposing an actual bill but says he wants to show he's open to such measures, and Senate Finance Committee Chair Max Baucus (D-MT) is said to be supportive. Smith claims that using cigarette taxes would be justified by the link between cigarettes and healthcare, which is not exactly a watertight argument since the vast majority of children served would not be smokers. Of course, efforts to find revenue sources for SCHIP are welcomed. (SCHIP faces a shortfall and the President's proposed budget would leave 1.4 million fewer children served by the program in 2012.)

But there are two problems with cigarette taxes. First, as is the case with sales taxes generally, they are highly regressive, taking a far greater percentage of income from poor households than the wealthy. Second, they are bound to be a declining revenue source. The value of the tax is reduced over time with inflation, and if smoking really does decline as a result of the tax increases, then the revenue also declines, leaving important health programs in a lurch. Of course, if the real purpose is simply to reduce smoking, then cigarette taxes can be quite effective in that regard. For more, see the ITEP policy brief on cigarette taxes.

February 25, 2007

Florida Property Tax Repeal: Editorial Reactions

In the wake of a proposal last week by the Florida State House of Representatives' Republican leadership last week to repeal all homeowner property taxes, the proposal continues to find a skeptical audience among state media outlets. The Jacksonville Sun's editorial board weighs in on Sunday's op-ed page, and they've got good questions for advocates of repeal:
But how would local governments absorb the lost revenue and how would their tax distributions be sorted out?
Would becoming the highest sales-tax state in the nation discourage tourists or drive business to border states or to the Internet?
What about the hit on the poor from a sales tax increase?
These are all legitimate and well-stated concerns. The most likely answers to these questions are "With difficulty," "Almost certainly," and "The poor will pay more."

The Sun has its own broad recommendations that generally focus more on goals than on strategies:

More fairness: The property tax benefits are tilted too far to those who have been in their homes the longest. Some longtime home-owners pay no property taxes at all.
More balance: Businesses and other nonhomesteaded property owners are getting rocked with higher taxes. Some type of reasonable cap is in order that protects them but allows for moderate growth in tax revenues.
Consideration for local governments: State and federal governments, meanwhile, are shifting costs to the local level. Most governments have room for belt-tightening, but beware of placing one-size-fits-all limitations on local government spending.
More moderation:
Officials must be careful not to make fixes that are worse than the problem itself. Officials should phase in changes so that adjustments can be made.
More information: Taxes are complicated. Floridians need as much analysis as possible to understand how any changes would affect them, businesses, local governments, schools and the state overall.

These broad goals are all right on. The question is, when will anyone with a voice in this debate start talking about the forgotten reform option-- enacting a personal income tax?

February 23, 2007

White House May Be Negotiating With Itself on the Alternative Minimum Tax

By now many people know that the Alternative Minimum Tax (AMT) is likely to be modified because it was meant to be a back-stop tax for the super-rich but will start affecting the more moderate-income families if the existing AMT exemptions are not extended. By now, most people in government know that "fixing" the AMT is not cheap. Continuing Congress's recent practice of applying a one-year "patch" each year will cost $250 billion over the next four years.

What nobody knows, however, is whether the President thinks AMT reform should paid for or not. Since some members of Congress, including Senate Finance Chair Max Baucus (D-MT), have proposed repealing the AMT altogether (which could cost $1.5 trillion over a decade), the possible implications for the federal budget deficit are alarming. Senate Finance Committee ranking member Charles Grassley (R-IA) is adamant that the AMT be repealed and not paid for because, he argues, it is a tax that was not expected to have the effect it will have. This logic is a little difficult to follow. Even if it was true that no one saw the AMT affecting more moderate-income families, it's rather difficult to see how this leads him to the conclusion that the super-rich, who were the intended target of the AMT in the first place, should also get a break from the AMT and that it should be deficit-financed. But anyway, it's entirely untrue that this effect of the AMT comes as a surprise. The original Bush tax break package enacted in 2001 intentionally changed the AMT only for one year, which made the projected cost of the tax break seem smaller for budget scoring purposes. By assuming that the AMT would remain unchanged (except for one year), the Congressional Budget Office had to conclude that the AMT would take back a lot of the tax cuts, therefore lowering the projected costs and allowing the administration to say that the proposal was not quite so expensive as it would otherwise appear.

But of course it was really assumed that the AMT would be changed so that it would not take everyone's tax breaks away, just as it is assumed that the AMT will be changed this year. One difference this year, however, is that more people are talking seriously about a permanent fix rather than continuing the annual practice of one-year patches. Another difference is that PAYGO rules now in place in the House prohibit, at least officially, increasing the federal budget deficit. The Wall Street Journal has noted that the White House has signaled that it is interested in some sort of budget-neutral reform without being specific. Last week White House Press Secretary Tony Snow gave a muddled response that tried to assert the President was not, in fact, in favor of any sort of tax increase but that the White House was open to suggestions for how to fix the AMT.

So essentially conservatives in the White House and in Congress pushed massive cuts in the regular income tax that would greatly reduce revenues and cause more people to be affected by the AMT, and then when more people were affected by the AMT they cried that this was unfair and unexpected and that the AMT should be cut or repealed which would cause a further loss of revenue, and that any attempt to replace the revenue lost as a result of an AMT reform would be a tax increase. Or something like that.

The current conservative thinking seems to be that not only is the President and Congress forbidden from raising taxes on Americans, they are also now forbidden from even paying for any provisions that lower taxes on the middle-class by raising revenues with other changes in the tax code. (Meanwhile, a larger and larger percentage of our tax dollars goes toward paying the interest on the national debt and the President calls for cuts in programs that have an insignificant effect on the federal budget deficit, in the name of "fiscal discipline.")

Is the President in sync with this conservative ideology or are there any signs that he may lapse temporarily into common sense and try to pay for part of his mess? Tony Snow's response to questions about paying for AMT reform were not exactly crystal clear. He said, "The President doesn't believe in tax increases," and described how the AMT was hanging over many middle-income families and kept at bay only by the one-year patches Congress has enacted, and said Congress should be able to find a solution. He said, rather melodramatically, "it's a cruel tax and it's an unacceptable tax," which is odd seeing how the President did not bother to alter it much with his tax cut package back in 2001.

When asked if the President proposed raising taxes in his health care proposal (which essentially would reduce tax breaks for health insurance for some but expand them for others) he essentially replied that it wasn't a tax hike because people could simply leave their expensive health care plans that exceeded the tax new tax subsidy and take up one that would be fully tax deductible under the President's plan. It's hard to see where this logic might end. Maybe ending the deduction for home mortgage interest payments would not be raising taxes because people could choose not to buy a home, or maybe raising the highest rate is not a tax increase because people could choose a lower-paying job.

These rhetorical acrobatics were followed by this long-winded attempt to avoid saying anything of substance, in which he begins by rejecting tax increases but ends by leaving them on the table:

Look, again, the President is not for tax increases. And so what we've said all along is, you've got 20 months to figure this out. What happens a lot of times is that people try to do preliminary negotiations through the press by characterizing what they think the President may or may not do. It's always interesting, because they never tell you what they're going to do. The fact is, both sides have an opportunity, so let's see what people have to propose.

And there have -- we have certainly been having -- we've been having conversations with people on both sides of the aisle because it is a problem. Democrats realize it, Republicans realize it, and they want to fix it. And I think we do have enough time right now where people don't have to rush and get themselves into a political fight. They've got an opportunity to try to come up with a calm and rational way to do it. We don't think it needs to involve tax increases, but we're certainly open to hearing what other people have to say.

The words "calm and rational" are perhaps more important than they appear, since the White House is probably particularly keen to avoid hysterics from conservatives who believe that actually paying for any change in the tax code is a betrayal of their principles.

February 22, 2007

New Online Letter Campaign from CTJ

Tell Congress: Stop the IRS
from Using Private Debt Collectors

Call on your Representative and Senators to stop the IRS's use of private debt collectors to locate delinquent taxpayers. The program is wasting taxpayer dollars and could put taxpayers' personal information at risk.

It's easy. Even if you're not sure who your Representative and Senators are, you can just fill in your address below, and our system will figure out which members of Congress to send your letter to. You can just send the letter that's already written below or you can write your own.

Legislation has been introduced in the U.S. House of Representatives and the Senate to end the program, which the IRS began last fall.

Click here to send your members of Congress a letter in support of this bill, which will end the IRS's use of private collection agencies.

One problem with the program is that the private collectors receive a commission of 21 to 24 cents for each dollar they collect, while IRS employees could do the same work for just 3 cents for every dollar collected. It is also feared that the private debt collectors, driven by large profits, will have a greater incentive than IRS employees to violate the privacy rights of taxpayers in order to increase collections.

Check the CTJ Congress Page for more information and updates about this issue.

February 19, 2007

Indiana Property Tax Repeal Effort Stalls (For the Moment)

We called it the "worst property tax reform idea ever" a while back-- and Indiana lawmakers appear to agree, sorta. State Senator Clarence Weatherwax presented his two-pronged plan for Indiana property tax "reform" to a Senate committee last week, and got a response that the South Bend Tribune characterized as "lukewarm."

Weatherwax's plan has two components: SJR 16, which would repeal all state and local property taxes, and SB 538, which would establish a new spending limit for Indiana state government. The spending limit would be based on growth in population and inflation. (See this report from the Center on Budget and Policy Priorities for more on why a "population plus inflation" spending limit is too constrictive.)

Sounds pretty simple, right? You set up a spending limit that says any revenues over the "population and inflation" limit can only be used for one purpose: replacing lost property tax revenue. That way, the story goes, local governments aren't completely defunded when the property tax goes away. But the Weatherwax plan turns out to be too simple:
Weatherwax estimated that it also would take a 1 percent increase in the state income tax, a 2 percent increase in the state sales tax and a local option income tax increase to replace property taxes.
But oops, Weatherwax forgot to include these tax hikes in his plan:
When committee members suggested incorporating those increases into SB 538, Weatherwax said he decided to pull both bills from consideration rather than risk defeat.
He has a good reason for doing so--tax hikes can't originate in the Indiana Senate--but that's a problem he needs to overcome before such a plan can ever be taken seriously.

Senator Robert Meeks put his finger on why Weatherwax needs to fix this problem if his plan is ever to be taken seriously: if the easy parts of the plan (capping spending, repealing property tax) went before voters without forcing them to also think about the hard part (hiking other taxes to make up the revenue loss), they'd love it.
Meeks also questioned whether voters would approve a referendum on eliminating property taxes if they knew they would face increases in state income and sales taxes, as well as the possible elimination of some local services. "They would vote for it because they don't know there are consequences, they don't have all the facts," he said.
This is an excellent point, and one that raises important questions about how direct democracy should be used on tax issues. If lawmakers are going to put these questions before voters, they need to make sure they're presenting voters with a fiscally sound package. A package that addresses the easy questions, but leaves no provision for answering the hard ones, doesn't deserve to take up space on the ballot.

February 18, 2007

Iowa Cigarette Tax Hike: Pick a Goal

Iowa is the latest state in which tax-averse lawmakers are looking to the cigarette tax as an alternative to more sensible (but less popular) revenue-raising ideas. The editorial board at the Clinton Herald comes down hard on the idea that the cig tax can be used both to pay for public services and to discourage smoking:
The $1 tax increase would bring in roughly $130 million, according to state estimates, which [Governor Chet] Culver wants to use to expand access to health coverage. But anti-tobacco activists are happier about the potential impact on the number of people who smoke, hoping the extra cost will discourage people from continuing their addiction or, in the case of teens, make smoking too costly a habit to begin.
As we have argued before, the two arguments are mutually exclusive. If the state raises the cigarette tax to generate money for health care, then it needs people to continue smoking at exactly the same rate as today. Otherwise, the money will dwindle and something else will be needed to prop up that portion of the budget...All we’re asking is for lawmakers and the governor to be up front about their plans. If they want to raise more money for health care, fine. If they want people to quit, fine. But it is time for everyone to acknowledge that both goals cannot be met simultaneously.
We've talked before about the basic dishonesty of asserting that a cig tax can achieve both revenue-raising and revenue-losing goals. But it would be hard to express this more succintly than the Clinton Herald does here.

February 15, 2007

Indiana Cigarette Tax Hike Advances

The Indiana House Public Health Committee sent a Valentine to Indiana smokers yesterday, unanimously approving a bill that would almost double the state's cigarette tax from 55.5 cents per pack to $1.10 per pack.

Lawmakers are giving two very different answers about what this proposal is supposed to accomplish. On the one hand, it's apparently going to be the sole funding source for a plan to provide health coverage for low-income Hoosiers. On the other hand, it's supposed to act as a stick to make Indianans stop smoking. Here's what Governor Mitch Daniels said in defense of the proposed cigarette tax hike last week:
"No one's out to injure anybody's business," Daniels said last week. "But reducing the second- highest rate of smoking in America is an important public- health issue in this state. Keeping young people from smoking is a very important objective. "
These are obviously conflicting objectives. If you want the cigarette tax to pay for health care, well, the yield of the tax had better grow each year at least as fast as the cost of paying for health care. But if you want the cigarette tax to act as a deterrent, preventing people from smoking, then really what you're shooting for is a decline in the amount of tax that actually gets collected.

Taken on their own, these are each pretty good goals: health care is good, and smoking is harmful. Encouraging one, and preventing the other, are both good objectives. But if Indiana lawmakers ultimately give the thumbs up to this proposal, one of these objectives simply will not be met.

February 13, 2007

Lieberman's War on Terrorism Tax

Last week, Senator Joe Lieberman (D-CT) said in a committee hearing that perhaps the federal government should enact a new tax to fund the "war on terrorism," by which he presumably means the Iraq War as well as the war in Afghanistan and other anti-terrorism efforts. I imagine I was not alone when I thought that sounded like a good idea... six years ago. With all due respect, it's startling how what once seemed like common sense today sounds strikingly innovative. What we got instead of a common sense approach to funding anti-terrorism activities and military engagements was the fiscal equivalent of putting two wars on a credit card.

I think I'll find it difficult to explain to my kids several years from now how America responded to September 11. I'll have to explain that in those first few years, Congress decided that what our country needed was a tax cut while we spent hundreds of billions of dollars on two wars, pushing the country, which had a surplus at the start of Bush's presidency, deep into deficit. The tax breaks account for half of the federal budget deficit.

To his credit, Senator Lieberman did vote against most, but not all, of the Bush tax breaks (and thus received a passing score of 80% from CTJ's Congressional Tax Report Card). Here's hoping others take up this theme. Better late than never.

February 09, 2007

Arkansas: Grocery Tax Cuts on the Move

2007 is barely a month old, but cutting the grocery tax has already emerged as the hip new state tax fad of the year (if such a thing is possible). Lawmakers from Tennessee to Utah to Idaho to Mississippi are discussing it. But things appear to be moving fastest in Arkansas, where the House of Representatives has unanimously approved a cut in the state sales tax on food.

The House-passed bill would cut the state sales tax on food from 6 percent to 3 percent, following up on a campaign pledge by then-candidate Mike Beebe in last fall's gubernatorial race. And every indication is that the Senate will endorse the bill as well.

It wasn't always smooth sailing, though: as the legislative debate opened in January, progressive policy advocates publicly questioned whether a cut in the food tax was the best option for Arkansas tax reform. In particular, Arkansas Advocates for Children and Families released a January report comparing the benefits of a grocery tax cut to more targeted tax reforms such as an Earned Income Tax Credit (EITC).

The AACF report was right on target: an EITC would do a much better job, at a much lower cost, of improving the fairness of Arkansas' tax system, than Beebe's pet idea of cutting the grocery tax. Not surprisingly, Beebe took issue with AACF's stance. Also not surprisingly, he was unable to attack the AACF report on its merits, and chose instead to reiterate that a food tax cut would benefit more people.

This disagreement with AACF's argument was utterly insubstantial: their whole point is that an EITC would offer targeted tax tax cuts to a smaller group of fixed-income families, and Beebe's entire criticism was that a food tax cut would offer tax cuts to more people. Which amounts, of course, to agreeing with AACF's analysis.

The food tax cut will likely be law a week from now, but this debate will remain important. As long as Arkansas continues to rely heavily on the sales tax, low-income families will get the shaft under Arkansas' tax system. Whether this year or next year, an EITC will remain a great step towards achieving a minimal level of tax fairness in Arkansas.

February 08, 2007

Coming Soon: Easy Decision for Nebraska Lawmakers

Last week Nebraska Governor Dave Heineman testified before the Revenue Reform Committee regarding his tax reduction bill. The bill's major components include lowering income tax rates, decreasing the number of income tax brackets and eliminating the marriage penalty. Over four years the complete tax cut package is expected to cost a whopping $1 billion.

An ITEP analysis showed that making these reductions to the state's income tax reduces taxes, on average, for the wealthiest 1 percent by over $6,500, while the lowest income Nebraskans those with an average income of $11,000 will see an average tax cut of only $13. In fact, 72% of the total tax change goes to the wealthiest 20 percent of Nebraskans. While the majority of Nebraskans will benefit from the proposal, the regressive nature of the plan is striking.

Opponents of the proposal also testified regarding the unfair nature of the Governor’s plan, also saying that Nebraska can't afford tax cuts of this magnitude. Many state legislators, advocates, and concerned citizens think the Governor's proposal is taking the wrong path; instead they see a need for fundamental property tax reform and not regressive income tax reductions that help better-off Nebraskans.

Recommendations for fixing the state’s property tax abound. Some Senators are advocating for a $500 refundable property tax credit for all homeowners. But because the credit isn’t means-tested and excludes renters, the credit isn’t targeted to those Nebraskans most in need. Many states with property tax credits do take into account the fact that renters pay property taxes.

Clearly lawmakers and advocates are dealing with complex and expensive choices. Let’s hope they keep in mind the needs of Nebraskans with the least ability to pay. One way Senators could show their commitment to low and middle income workers is though passing a bill, expected to be heard next month in Committee, that expands the state’s refundable EITC from 8 percent to 15 percent of the federal. The EITC has long enjoyed bipartisan and popular support--perhaps a vote on this bill won’t be such a difficult decision for state leaders.

February 05, 2007

Maryland: Taxing Ice-- Or Not

Lawmakers in several states (including Tennessee and Wyoming) are currently kicking around the notion of exempting food from their state sales tax. This will certainly be a progressive move in any state that does it--as long as states can afford to make up the revenue loss.

But here's a cautionary note, and it's a caution not so much about exempting food as about exempting anything: when Maryland decided, back in the day, that they wanted to exempt food, they had to decide what "food" really means. And one thing they decided was that ice wasn't food. Unless you put it in a drink, in which case it actually is food.

For whatever reason, Maryland tax administrators decided last fall that they needed to revise their sales tax regulations to make it clear that ice sculptures are taxable. The revised regulation on this can be found here.

Now, it's hard to see why you'd need to make this explicit-- maybe some joker tried to put an ice sculpture in their drink? But the broader point is that anytime you draw a line in the tax code between what's taxable and what's not, it ends up being a complicated process. Good intentions make complicated tax laws.

This isn't to say that exempting food is a bad idea. It's a very progressive move. But, like any exemption, it has its administrative cost.